The Narendra Modi-led BJP government has clearly outlined that it wants to upgrade the Indian armed forces. Towards that end, defence minister Arun Jaitley has announced several defence reforms measures recently, key among them was the move to increase foreign direct investment from 26 percent to 49 percent.
In an interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, Deba Mohanty, chairman and chief executive, Indicia Research and Advisory, a defence consultany, and a former FICCI defence committee member, said that he was hopeful of more reforms beyond the move to hike FDI.
“Within 15 days of taking charge, Jaitley had called for ‘more procurement and faster procurement’,” he said. “In the last three defence acquisition council meetings, the government has already cleared more than Rs 120,000 crore of purchases.”
Below is the edited transcript of the interview on CNBC-TV18.
Latha: There was a lot of publicity for the move to allow 49 percent FDI for manufacturing defence equipment. Have you noticed any other reform measures and procedures that the new government has initiated?
A: Before I come to that, I must point you to a significant statement that was made by defence minister Arun Jaitley within 15 days of assuming charge when, speaking to reporters at the Western Naval Command in Mumbai, he called for ‘more procurement and faster procurement’.
We have already seen more procurement. In the last three defence acquisition council meetings, the government has already cleared more than Rs 120,000 crore of purchases. Faster procurement would also mean that the procedural bottlenecks, which have been hampering the defence procurement of the country and negatively impacting the military’s modernisation programme, are out on their way.
Apart from FDI, which the government has raised to 49 percent and even more on a case-to-case basis, they have simplified the licensing procedure, simplified the security clearance procedure, they are looking into a whole set of issues like refinement in the next defence procurement procedure, looking at the defence offsets obligation issues. So, a lot of homework has been made. Therefore, we should be hopeful of further reforms in time to come.
Sonia: In order to speed up the modernisation of the armed forces, the defence acquisition council has gone ahead and cleared Rs 80,000 crore worth of projects. What kind of realistic opportunity do you see for private sector players in this chunk and which are the companies that could benefit from this?
A: If you look at the last three-four years, we had three kinds of procurements: buy global, where the technology is not available, so you do outright purchases; you have buy-and-make, you buy something and then you make it through licence production; or you make products, where procurement is given to private sector to indigenously manufactured.
The number of make products have been very low -- less than half a dozen in the last three years but in the last four-five months, the government has given a thrust to the private sector. For instance, it has indicated two major projects may be possibly awarded to the private sector: the military transport aircraft and the submarine projects.
These are very huge projects and I am sure that the existing companies who have been there as a component supplier or as a bigger supplier to the Indian defence sector would be certainly benefited.
As far as the companies are concerned, we have half a dozen major companies who have been established players in defence although they may not have done any system manufacturing but they have manufactured very critical components of major defence items. Godrej Industries has been there, Tata has been an established player, the Mahindra and Larsen & Toubro are major players.
As far as this Rs 80,000 crore in which the submarine project has been – will a portion of that be awarded to the private sector? L&T has got a good amount of expertise in submarine and related ship building components. So, L&T could be looked at but apart from that, we must remember the other private companies are not defence-dependent companies; and only a portion of their activities are related to defence.
So, it will take a while for us, we need not be overtly optimistic but we can certainly be optimistic for the private sector which could get some kind of orders in time to come and these are projects that have just been announced. Now the nitty-gritty will start. So, we need to wait for a while in order to see where the water flows.
Latha: You said the defence minister announced that procurement will be faster. Has there been any actual change on the ground or are you only going by that pronouncement and you said Tata Group – is there any specific company that you will point out as benefiting?
A: As far as Tata Group is concerned, they have two good subsidiaries: Tata Power Strategic Electronic Division (SED) which is under Tata Power; and Tata Advance Systems and Tata Advance Materials, which are part of the Tata Group. They are not independently listed companies.
As far as your first point is concerned, about the number of projects which have been cleared - the fact that so many projects have been cleared in the last five months -- worth more than Rs 120,000 crore – it is unprecedented in the Indian procurement history. So, one can hope that speedy procurement will lead to faster implementation.
Sonia: The key issue in the defence sector for the last many years is that there has been a strong preference towards defence public sector undertaking (PSUs). Do you get a sense that this time around things will be different that a lot more preference will be given to the private sector as well and which defence PSUs would you back as the frontrunners?
A: There are only two listed defence PSUs: BEML and BEL and both are likely to do extremely well because they have got good order books and most of the defence electronic projects are awarded to BEL while BEML -- which was in controversy for some time though the CBI has made a closure report on that particular truck case -- will hopefully again bounce back to get more orders.
The Indian defence industry has been dominated and exclusively dominated by the defence public sector units, so most of the orders would naturally flow to them but if you look at the last ten years of effort of the government; be it the previous government or the current government, the essential effort has been to encourage the private sector.
In 2004-2005 there was this euphoria, which was created once the government opened it up for the private sector. The private sector became overtly enthusiastic but they needed to look at the complexity of the defence procurement mechanisms and the universe. The defence procurement ecosystem of the country, which used to be more complex and now with a lot of small changes that have occurred in the past few years, things are improving a bit. One need not be overtly pessimistic or overtly optimistic about things that are likely to come. But I think small changes will make big impact in time to come.